Shareholder Incentives for Utility-Based Energy Efficiency Programs in California

41 Pages Posted: 22 Dec 2008 Last revised: 8 Dec 2014

See all articles by Jiyong Eom

Jiyong Eom

Precourt Energy Efficiency Center

Date Written: December 12, 2008

Abstract

Energy efficiency is increasingly being recognized as a resource warranting aggressive public investment. The State of California has committed an unprecedented sum of $2.2 billion in ratepayer funds to utility-based energy efficiency programs from 2006 through 2008; the State finalized in 2007 the determination of the shared-savings incentive mechanism for the 2006-2008 programs and beyond. This study seeks to examine whether the adopted incentive mechanism would ensure an efficient delivery of the programs, and what reforms, if any, could be proposed to meet this end. I develop a game theory model for the implementation of the programs, in which a regulator adopts an energy savings target and a shared-savings incentive mechanism before a utility firm proposes program funding, gets the proposal authorized, and begins to manage the programs. The study reveals that each utility firm requires a certain minimum level of incentive rate, in order for the mechanism to encourage the firm to achieve the adopted energy savings target, eventually bringing non-negative bill savings to its customers. It also reveals that a higher-than-minimum incentive rate can achieve not only a greater net social benefit but also greater bill savings for customers. Model-based analysis of California energy efficiency programs suggests that a higher-than-adopted incentive rate is warranted and that social efficiency would be improved by customizing incentive mechanisms for individual utilities and updating them on a regular basis.

Keywords: Energy Efficiency, Utility Regulation, Shareholder Incentives, Shared Savings Incentive Mechanism, Ratepayer Funds

Suggested Citation

Eom, Jiyong, Shareholder Incentives for Utility-Based Energy Efficiency Programs in California (December 12, 2008). Available at SSRN: https://ssrn.com/abstract=1319130 or http://dx.doi.org/10.2139/ssrn.1319130

Jiyong Eom (Contact Author)

Precourt Energy Efficiency Center ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

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